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Institutions around the world provide three main types of CGS.
Under a normal guarantee, a guarantor provides a guarantee on the non-collateralised portion of a loan. However, the policy may fix a maximum limit of guarantee of the total loan.
For automatic guarantee, a pre-approved credit guarantee is given to participating FIs. It facilitates faster guarantee approval with less paperwork. It is a revolving scheme for a maximum guarantee amount on the unsecured loan of certain FIs.
Risk participation is a newly launched scheme, which allows Small Business Credit Guarantee Corporation to share the guarantee risk with FIs.
As a standard practice, if a guarantee provider denies the guarantee request, FIs are unlikely to issue the loan, or they tend to impose harsher conditions by increasing interest rates and to seek further guarantees. They even extend consumer credit services. Such diversification provides useful services to customers, enabling them to improve their business culture and financial management techniques.
Guarantee schemes represent one of the most powerful tools SMEs can use to access credit financing at appropriate price and terms and conditions. Thus all the actions the industry can take concerning the exchange of best practices, benchmarks, technical assistance and other actions such as institutional lobbying and marketing are of great importance to ensure the business community knows about the guarantee scheme and can make the best of it.
The three main guarantee organisation models may be summarised as follows: the public guarantee model reflects a guarantee scheme, which is typical of Asian players; the mixed model and private guarantee model reflect European cases. It has been observed that the greater the private component in the player’s ownership structure, the greater the ability for it to provide a range of complex and structured additional services in addition to guarantees.
In most of countries, the laws governing guarantee market players regulate many aspects, including their scope of operations, legal status and governance, capital and operating requirements, and their access to state-owned funds. The supervision and control of guarantee organisations are assigned to the ministries of the governments in many cases.
In Bangladesh, the central bank issued a Manual of Credit Guarantee Scheme (CGS) for Cottage, Micro and Small Enterprises (CMSE) on November 3, 2020. The proposed CGS is different from those offered by other economies. There is the involvement of state authority, but the Bangladesh Bank will operate the scheme.
The guarantee shall have three limits on the portfolio of loans or investments of participating FIs. The limits are portfolio guarantee limit; guarantee portfolio cap, and loan/investment guarantee coverage ratio. The CGS is intended to be a risk-sharing facility. A guarantee coverage ratio sets a maximum 80 per cent of the loan principal. There will be no interaction between the CMSEs and the CGS unit other than through the FIs. The BB will not evaluate the feasibility of SMEs to extend the service. FIs will study the feasibility and identify the SMEs to extend service.
The proposed programme of the BB is different from other countries. The central bank, the CGS and FIs will perform their responsibilities in an independent manner. There will be hardly any intention of close cooperation between them. Bangladesh may evaluate the CGS of other countries to modify its own model.
The author is a legal economist. He can be reached at mssiddiqui2035@gmail.com.